LLQP Life Insurance · Component 1.3 · 35% of the exam
A needs analysis projects income needs for 20 years using a real (after-inflation) rate of return. Which statement is correct?
- AUsing a real rate means inflation can be ignored in the income target, since the rate already removes it from the calculation
- Using a real rate keeps today's dollars for the income target while accounting for inflation, if applied consistently
- CReal rates apply only to permanent insurance, since term coverage is too short for inflation to matter
- DA real rate is always higher than a nominal rate, since it adds the inflation component to the return
Correct answer: B) Using a real rate keeps today's dollars for the income target while accounting for inflation, if applied consistently
There are two consistent methods: nominal returns with an indexed income target, or real returns with a level target in today's dollars. Mixing them — real return with an indexed target — double-counts inflation. Consistency is the point.
Why the other options are wrong
- AInflation is accounted for in the real rate; it is embedded, not ignored.
- CRate assumptions apply to the analysis, not to a product type.
- DA real rate is lower than the corresponding nominal rate.
Exam tip
Nominal return + indexed target, or real return + level target. Never mix.
Common mistake
Indexing the income target and also using a real return.
What this tests
CISRO competency component 1.3 — Assess the client's needs and situation — which is weighted at 35% of the Life Insurance module. Written against the published curriculum.
More from component 1
- A client's existing policies were all sold by another agent who has left the business. The reviewing agent should:
- A client supports an adult child with a permanent disability who will never be self-sufficient. In the needs analysis this is:
- A self-employed client's income fluctuates widely year to year. When determining the income to replace, the agent should:
- A 58-year-old client plans to retire at 65 and has a pension that will pay a survivor benefit. How does time to retirement affect the life insurance need?
- Which of the following is a capital expense arising at death, rather than an ongoing income need?
- A client is the sole income earner in a household with a stay-at-home spouse and two young children. The greatest risk that life insurance on the client addresses is:
Practice the whole Life Insurance module
Timed sets weighted like the exam, and review of every question you miss. Free to start.